Economic policies for full employment in an enlarged europe

Brussels, 3 December 2003

25th Anniversary Conference of the European Trade Union Institute (ETUI)

Statement by Mrs. Brigita Schmögnerová, Executive Secretary

1. The general context of the European Employment Strategy (EES)

The future EES will face two challenges: the intensified competition in the global economy and the accession of 10, respectively 12/13 new Member States.

Withstanding the intensified competition in the global economy is a pre-condition for achieving sustained growth and employment. There is no possibility for EES not to be linked to the EU strategy for competitiveness and growth formulated in Lisbon in 2000. In view of this it is also appropriate that the time frame of the EES has been aligned with the Lisbon target date of 2010. The Task Force on European Employment has rightly emphasized the need for more flexibility of labour markets, greater adaptability of companies and workers, strengthening investments in human capital, etc.

Economic policies should promote growth that generates jobs. Growth without employment is not a goal. The Lisbon Strategy’s target is “to become the most competitive and dynamic knowledge-based economy in the world with more and better jobs and greater social cohesion” by 2010. Growth does not always generate new job opportunities. Governments’ policies should therefore promote growth generating employment. At the same time employment growth should not put a brake on economic growth and competitiveness. To better reflect the interdependencies of economic growth and employment it was decided to link EG to BEPG.

Unemployment is a social waste often associated with social exclusion and increased risk of poverty. It is vital to put employment goals at the centre of social policy as is recognised in the European Social Agenda.

While the importance of extensive labour market and other structural reforms for promoting employment and growth is generally acknowledged, the role of macroeconomic policy to promote employment and particularly to react to changes in the level of economic activity also has to be emphasized. We know from the experience of the Federal Reserve of the United States of America that monetary policy can react in a countercyclical way to a cyclical slowdown and the associated deteriorating labour market conditions without endangering the goal of price stability. Would this imply a need to re-define the ECB targeting and perhaps adopt that of the FED? This deserves deep thought.

The increased flexibility of the Stability and Growth Pact is induced by recognition that its rigidity prohibits countercyclical fiscal policy, thus deteriorating employment prospects. We therefore need pro-employment fiscal policy that, other things being equal, will strengthen fiscal performance, as employment generates consumer demand and higher growth, increases tax revenues, reduces social and unemployment benefits, and reduces the general government deficit.

The Lisbon and Stockholm European Councils defined employment targets in general, for women and older workers.

These targets, if achieved, would significantly reduce the gaps between the EU and the employment-to-population ratios prevailing in the United States, which are currently at some 74 per cent for the total employment rate and 68 per cent for the female rate.

The economic rationale behind targets defined in terms of employment rather than unemployment rates resides mainly in the opportunity offered by a broader employment base to reduce tax rates on labour without necessarily reducing the scope of redistributive policies. This could induce growth.

There is currently a large variation in employment rates across the European Union (chart 1). They range from levels already exceeding 70 per cent in Denmark, Sweden, the United Kingdom and the Netherlands, to lows of 52 to 56 per cent in Italy, Spain and Greece. The Mediterranean countries of the EU face the greatest challenge in making progress towards the Lisbon targets. In order to reach these, the southern countries will have to increase their employment to population ratios by about 2 percentage points per year. More importantly, in many EU countries (Belgium, France, Greece, Ireland, Italy, Luxembourg and Spain), convergence to the “Lisbon scenario” will require increasing labour force participation rather than simply absorbing unemployment.

The low employment rates prevailing in many European countries are mainly the by-product of the exclusion from work of young people and women, since the employment rate for the core group of middle-aged men is more or less the same across the EU (and not much different from that of the United States).

Even if this was not explicitly stated in Lisbon, the attainment of the target is likely to involve a further expansion of part-time and temporary jobs, as well as more low-wage/low-productivity jobs. Part-time jobs are, in any event, needed to accommodate the higher participation in the labour market of women and young people.

It has been estimated by the European Commission that more than 15 million new jobs need to be created to meet the Lisbon employment rate target for the current EU15 Member States. This will not only require a considerable reduction in the number of persons registered as unemployed, but also the reactivation of a large proportion of the working age population that has withdrawn from the labour force. These amount to more than 50 million persons, not taking into account the 15-19 year age group!

The challenge is enormous and progress towards meeting the targets has been lower than expected. In 2001, the actual average EU15 employment rate was only 64.5 per cent, the female employment rate was 55 per cent and the older workers employment rate was somewhat below 40 per cent. On current trends both the interim targets for 2005 and the final targets for 2010 will not be achieved. It is also clear that achieving these targets will become even more difficult for the enlarged EU given that the (enlarged) EU statistical average for employment rates will be lowered relative to the EU15 statistical average.

These quantitative targets should not lead us to ignore the fact that the quality of jobs also counts. Jobs should be of good quality, for example they should be safe for workers’ health and provide an acceptable minimum level of pay that ensures a sustainable livelihood for workers.

The formulation and implementation of economic, employment and social policies cannot be left only to governments. Success requires the close collaboration of all concerned, involving central and local governments and the social partners (trade unions and business) to ensure that different interests are reconciled and the benefits fairly shared. Is the existing legislative framework of industrial relations in the EU satisfactory? Does it respond to new challenges? Should it be complemented by other legal rules such as on Corporate Social Responsibility? How can PPP be better developed in generating jobs? These are some of the questions to be responded to in future.

2. The employment challenges in the acceding countries

Enlargement will significantly deteriorate indicators like unemployment rate, long-term unemployment, youth and women unemployment, employment, etc. in the EU. It will represent a new challenge for achieving the Lisbon targets by 2010. The transformation from CPE to market economy has led to a marked rise in unemployment in the acceding countries. The restructuring process is still not complete and further significant job losses in declining sectors (notably agriculture and mining) can be anticipated.

To illustrate this: in the 1990s the labour force shrank considerably in all acceding and candidate countries; in some cases the employment and activity rates dropped by some 10 to 15 percentage points. Employment rates were still on a declining tendency in many countries in recent years. Recent data show that total employment rates were close to the EU average (of 64 per cent) in the Czech Republic, Romania and Slovenia, but significantly lower in the other countries.

In the late 1990s there were some positive employment developments; in some countries the female labour force increased (Hungary, Poland, Slovakia), or stopped falling (the Czech Republic), while in others the decline continued but at a much slower rate than in the first half of the 1990s (Estonia, Latvia, Lithuania).

With the start of output recovery, labour demand in the acceding countries has obviously grown, contributing to some recovery in employment and the lowering of unemployment rates. However, the positive labour market effect of growth during the transition has been far below expectations: thus while a number of acceding countries have already surpassed their 1989 GDP levels (the Czech Republic, Estonia, Hungary, Poland, Slovakia, Slovenia), employment is still far below its pre-transition levels. This outcome reflects the rapid productivity growth in the acceding countries. But it is also indicative of the specific nature of labour demand (in terms of skills and sectors) during the transition and of some major structural and institutional problems (in particular in the labour market), some of which are noted above.

Foreign direct investment has been a major factor of successful transition, and in particular of new job creation. In the countries with large inflows of FDI, the greatest job creation has occurred in the multinational companies. However, there are clear limits to this FDI job creation. Since multinationals in manufacturing sectors frequently use highly productive capital-intensive technologies, their labour demand is limited. They will usually only employ highly skilled, preferably young, people. It is also unlikely that multinational companies will bring jobs to rural areas. FDI may also have negative spillover effects on employment in other domestic firms, because often FDI firms drive local competitors out of the market. It is therefore important to design strategic economic policies that aim at maximising the potential positive spillover effects of FDI on domestic firms.

The small and medium-sized enterprise sector has been identified as another main source of new jobs. It has developed partly in the wake of the restructuring of large enterprises. Many new firms also emerged as a consequence of the opening of new market opportunities, creating jobs not only for their owners but also for wage earners. At the same time, many of the de novo small private firms are basically family businesses for self-employment of the owners plus a limited number of “external” employees. Such firms often only contribute to a one-off job-creation when they are established, as they do not seek substantial growth of their business.

Will EU accession have any implications for the labour market in the acceding countries? Will it increase unemployment or the opposite? The effects will be mixed. On the one hand, new members will have to withstand higher market competition and further increase productivity with job implications. The expectation of higher GDP growth can eliminate the first type of effects. At any rate targeted policies will be unavoidable.

3. Policies for increasing employment in the acceding countries and the EES

The European Employment Strategy (EES) remains the key instrument for achieving the Lisbon targets in the enlarged EU. The candidate countries were integrated in the EU coordination on employment, which is an important part of the acquis communautaire, as early as 1999. In “Joint Assessment Papers” they have in the meantime analysed the key labour market challenges and are in the process of implementing measures designed to foster employment and lower unemployment.

The EES initiated an open method of coordination as a new working method including the development of National Action Plans (NAPs) for the EES targets and the EU wide surveillance of progress achieved. However employment policy remains within the domain of each EU Member State. The acceding countries have developed administrative capacities to efficiently participate in the Open Method of Coordination (OMC), they have already developed NAPs which have been incorporated into the surveillance procedure. But if measured by achievements there is no remarkable progress. Even if this is not explicitly admitted there is often little political will and commitment of governments to participate in the process and the OMC is considered as an extra burden. To increase the role of OMC in fighting unemployment and increasing employment in new Member States is a challenge. One way to achieve it is strengthening linkages of the EES and EG to other EU strategies and policies as noted earlier, and to develop an integrated approach to employment strategy. Employment will have to be a key agenda for governments, in partnership with the private sector and civil society. The OMC in employment should provide more opportunity to learn from exchange of experience, best practices, etc.

In view of the above discussion, what is needed are policies addressing the two aspects of the employment-output growth dichotomy: on the one hand, policy should support employment-generating-growth; on the other hand, specific policy measures should target the increase in participation and activity rates, thus raising labour input. In the field of employment-generating growth policies much attention should be given to SME, FDI and education. As FDI are and will remain an important factor of new job opportunities in the acceding countries, acceding governments tend to compete for the FDI by providing preferential treatment for FDI. This generates “race to bottom” in taxation with likely detrimental impacts on fiscal developments, non-compliance with the EU labour and environmental standards, and thus provokes criticism from the EU and also domestic investors. A more balanced policy to attract FDI is therefore needed, like providing more predictability, better regulatory environment, good infrastructure, skilled labour force, etc.

Employability and participation in the labour force depend to a great extent on the knowledge and skill characteristics of each individual and more generally on human capital formation. Human capital formation will be key for coping with the intensified competitive pressures in the enlarged Europe and the global economy at large. Here governments have a key responsibility: to reform their provision of education and training, both for youth and adults, so as to meet labour demand and enable workers to maintain and improve their employability through lifelong learning. Enterprises should be encouraged to invest in the education and training of their workforce and to build on the functional rather than numerical flexibility of labour.

Geographic mobility of workers needs to be promoted to cope with mismatches between regional labour supply and demand. This will not be possible without improving the public infrastructure and housing supply. Employment policies should therefore be linked to the policy of use of the EU structural funds.

An important role is to be played by the social partners, either within the framework of a bipartite dialogue or within the context of an institutionalised tripartite dialogue involving also the government. Relevant areas for dialogue and negotiations are for example the development of a vocational education system; fostering the adaptative capacity of firms, including by training of workers; developing an efficient wage bargaining system, which allows for an adequate wage differentiation.

The recent report on industrial relations in the candidate countries published by the EIRO (European Industrial Relations Observatory) concludes that the collective bargaining and worker participation in the candidate countries is not very developed. The acquis communautaire is very limited on the subject. A recent Directive on worker participation is being implemented gradually. In general the level of regulation of “industrial relations” in the EU is low. In the absence of a EU regulatory framework, the role of the ETUC (European Trade Union Confederation) and UNICE (European Employers Organisation) to promote adequate industrial relations in the new EU members is key.

Employment protection legislation (EPL) has an important role to play in the set of policies aiming at higher employment. Very strict EPL tends to contribute to lower rates of labour turnover. It does not lead to longer job tenure, but it is strongly associated with smaller flows into, and longer spells of, unemployment. Besides income support in unemployment, early retirement and disability pensions, the level of social benefits and assistance may also have an important effect on the decision to withdraw from or return to the labour market. So far, the impact of EPL on labour market developments in the acceding countries has tended to be somewhat limited but not insignificant, especially as regards the speed of transition between employment, unemployment and inactivity. Hence more effort is needed in better coordination with other policies in order to increase the efficiency of EPL measures.